So…your spouse or ex-spouse effed up on your joint tax return, either deliberately or accidentally. The IRS sends a letter to both you and your spouse or ex-spouse and is now requesting money from not only him/her, but you. How is this fair? You’re not the one that made the mistake or purposely misled them. Don’t despair just yet, however. There is a potential solution here, and that’s innocent spouse relief, along with other types of possible relief that are similar in nature. Under the notion that the unaware spouse had nothing to do with the tax issue, he or she may be completely absolved of responsibility, or have that liability decreased, or have his or her liability separated from that of his or her ex-spouse.
First off, you must request innocent spouse relief. The IRS is not going to give it you on its own accord. Also, this request must be made in the first two years after the IRS first asserts that a tax deficiency is owed. The clock generally starts when you get that first letter from them.
After you request innocent spouse relief, the IRS will contact your spouse or ex-spouse. This is immutable and will occur regardless of whether there has been a conviction for domestic violence. The purpose of this contact is to let the spouse or ex-spouse know that you have filed a claim. However, the IRS will not share any personal information with him or her.
Shifting gears slightly, in a community property state, such as Texas, you are regarded as not being responsible for your spouse’s or ex-spouse’s tax debt if you didn’t file a joint return, did not include that income that generated the tax deficiency on your return, and did not know and had no reason to know of the actions of your spouse or ex-spouse as to the impropriety. The last point is based on a reasonableness standard, which examines what a reasonable person would know. Like a mafia wife, you can’t say that you had no knowledge of extra income not accounted for when you clearly should have known, if the facts bear that out. This is the rule as pertains to community income. Next, we’ll go into actual innocent spouse relief.
With a similar standard, innocent spouse relief is available to a spouse that files a joint return, which was signed by both spouses at the time, where it’s factually shown that one spouse didn’t know and had no reason to know about the impropriety, and it would be unfair to hold the purportedly innocent spouse responsible for the tax deficiency. Again, it’s a reasonable person standard – Would a reasonable person have known or should a reasonable person have known about the tax issue? In this regard the IRS might believe some of your story and grant you partial relief, but not grant you everything you asked for. If that’s the case, you’re only going to be absolved of some of the deficiency, potentially including principal, interest, and penalties.
Additionally, the IRS will look for any unfairness on your part in examining whether they should grant innocent spouse relief. Those factors are: 1) significant benefit to you from the underlying fraud or mistake; 2) spousal desertion; 3) divorce; 4) whether a benefit was derived by you from the fraudulent or erroneous return. In terms of significant benefit, the IRS will look for any anomalous circumstances that indicate something out of the ordinary, like if your non-rich ex-spouse suddenly gave you a million dollars (dumb example I know, but you get the point). In this case, you couldn’t say that you had no idea something was awry.
Under still other circumstances, while the IRS might not grant you immunity from the amount owed due to your ex-spouse’s misfeasance or malfeasance, you might be able to get them to separate your liability from your ex-spouse’s liability. In other words the IRS might say that you owe “X” and your husband owes “Y” and never the two shall meet. However, the requirements for this separation of liability relief are that you can no longer be married to the person and that you can’t have lived in the same household during the last 12 months from the date you filed for this relief. Finally, the IRS will not grant this type of relief if it is made evident that you knew or should have known about the fraud when you signed the return or that your ex-spouse transferred property to you in order to avoid the tax. Again, whether you should have known is examined through the lens of what a reasonable person in the same position would have known. Note that willful ignorance of a situation counts as knowledge, so you can’t pull the wool over your own eyes and say that you didn’t know.
Like the community property relief, if you didn’t file a joint return, you might be able to get equitable relief. This allows for the innocent spouse to get relief from a tax debt due to an unreported amount of income or an unpaid tax balance, such as only paying $3,000 on $7,000 owed. You are eligible for equitable relief if you can’t get innocent spouse relief or separation liability relief; you file a joint return; you assert a claim for this relief to the IRS; no transfer of assets between spouses occurred; the fraud was unknown to you; and the income from which the liability arose is not attributable to you. This last requirement can be rebutted if facts are shown that even though it was your income, you were the victim of a truly insane wacko of an ex-spouse who was solely responsible for perpetrating the fraud.
The IRS will grant equitable relief if there is a determination that it would be unfair to hold you responsible for all or some of the unpaid tax as a result of the misfeasance or malfeasance of your spouse. In this regard the IRS considers: marital status; economic hardship in terms of being able to satisfy basic living expenses; knowledge or reason to know about the tax fraud or error; an outside legal obligation such as a divorce decree making you liable for the tax; whether you derived a significant benefit from the tax fraud or error; compliance with tax years subsequent to the fraud or error; and your mental or physical health.
If you are attempting to obtain innocent spouse relief or any of the other relief mentioned in this article, do so by initially preparing Form 8857, Request for Innocent Spouse Relief. In addition, for more information on relief from a spouse’s or ex-spouse’s tax fraud or error, see IRS Publication 971.
Having trouble with innocent spouse relief or other relief? Call Dino Tax Co today at (713) 397-4678 or email firstname.lastname@example.org. The initial phone conversation is free. Also, if you feel so inclined, like us on Facebook at www.facebook.com/dinotaxco. We really appreciate your support.